U.S. Gasoline Demand Surges To New Record

In last month’s Short Term Energy Outlook (STEO), the Energy Information Administration (EIA) projected that it now expects record U.S. gasoline consumption this year:

Motor gasoline consumption is forecast to increase by 130,000 b/d (1.5%) to 9.29 million b/d in 2016, which would make it the highest annual average gasoline consumption on record, beating the previous record set in 2007 by 0.1%. The increase in gasoline consumption reflects a forecast 2.5% increase in highway travel (because of employment growth and lower retail gasoline prices) that is partially offset by increases in vehicle fleet fuel economy.

This projected increase follows several years of lower gasoline demand that resulted from persistently rising gasoline prices over the past decade. From 2002 to 2012 the average retail price of gasoline rose nearly every year, from an annual average of $1.39/gal in 2002 to $3.68/gal in 2012. Consumers responded to these higher prices in multiple ways, which cumulatively led to falling gasoline demand. Some even suggested that U.S. gasoline demand had permanently peaked, as a result of more fuel efficient vehicles and increasing adoption of electric vehicles (EVs). We can now say those predictions were premature.

Gasoline prices has fallen over the past two years. With the oil price collapse that began in the second half of 2014, the average retail price of gasoline fell to $3.44/gal in 2014 and then plunged to $2.52/gal in 2015. The average retail price fell to under $2.00/gal earlier in 2016, and is on pace to average even lower this year than in 2015.

As recently as February of this year the EIA was forecasting that this year’s gasoline demand would be below the 2007 peak, but demand has surged since then. In fact, I have analyzed the EIA’s estimates for Product Supplied – Finished Motor Gasoline and found that the average for the first six months of 2016 was the highest ever recorded for the first half of a year at 9.38 million bpd. The previous record for the first six months of a year was in 2007 at 9.30 million bpd. Following that, July’s average gasoline demand of 9.75 million bpd was the highest monthly demand ever recorded by the EIA.

Some have suggested that this higher level of gasoline demand is a reflection of higher U.S. exports of gasoline, and not actual U.S. demand. While it is true that the U.S. is exporting about 400,000 bpd of gasoline, according to the EIA that is already factored into the calculation of “Product Supplied.” Quoting from the EIA’s glossary:

Product supplied: Approximately represents consumption of petroleum products because it measures the disappearance of these products from primary sources, i.e., refineries, natural gas-processing plants, blending plants, pipelines, and bulk terminals. In general, product supplied of each product in any given period is computed as follows: field production, plus refinery production, plus imports, plus unaccounted-for crude oil (plus net receipts when calculated on a PAD District basis) minus stock change, minus crude oil losses, minus refinery inputs, and minus exports.

So the definition is taking into account both gasoline exports and gasoline imports into the picture. And in fact, the U.S. is currently importing over 800,000 bpd of gasoline — far more than we export.

Thus, the bottom line is that despite the growth of EVs and an increase in the overall fuel efficiency of cars on U.S. roads, gasoline demand has risen to record levels.

Might the EIA need better economic training? The consumption of fuel is highly elastic. The market will evaluate purchases to their best advantage. Consumer decision making is complex and works to maximize quality of life concerns. Having cheap energy will improve their ability for the pursuit, meaning provide them with more alternatives. Do I vacation within the state or travel to another region? Choose the low MPG van or take the Prius? Wait to combine shopping needs or go now? Purchase an RV or stay in hotel? Spend extra money to save utility or fuel cost or save the money for retirement account? Drive or public transportation? The decision making at commercial or industrial level will sway upon cost of energy as well. They will compute the best use of money resources for a given time period.

Some will conclude, that a carbon tax is needed or higher cost of energy is just the fix. That is often portrayed as particularly wrong headed thinking akin to those that are attracted to central control that can merely snap their fingers to do away with messy freedoms. We need to think of the mass market as the gross sum total of our intelligent decision making. The mass of “good” decisions for benefit is powerful and carries much weight upon good change. It’s efficient and maximizes the countries wealth exchange/creation. Some elitist think this is risky as they can see bad choices. Within human nature that bad choice was the best choice at that point in their life and no one could oversee the decision making process at that level anyways. So, elitist want restrictions, regulations, taxing privileges, laws, that will force citizens to make decisions in line with their thinking. Some of this is good as we all know, but this tactic does quickly reach a condition where the cure is worse than the disease. One will have to ask the question can we legislate morality? Or is it better to set up governance to maximize the environment to improve morality? Sure, as always, some misdeed will slip through a crack, but slippage even occurs with the heavy hand of government control. It’s illegal to murder, but it happens. Unfortunately, the current mentality of public educated citizenry have been trained to demand ever more laws from legislatures and make assumptions that is the cure. Teary eye testimonies upon the Hill.

We have to change our mindset, to understand than invigorating the mass market takes freedom of choice. That “controls” must be updated, efficient, and easy to conform to. So, we need to compare the maze of myriad environmental laws at every level of commerce. The investment within government control for the task, loss of freedom that makes it possible, cost of economy per slicing the hamstring, etc.We need to realize the true cost of such easy to pass legislation is horrible to nations GNP growth. As compared to what? My guess a simple carbon sales tax that directly offsets taxation of some other. Revenue neutral. Pull the plug on the maze of carbon regulations and retreat the spread of government bureaucracy.

Maybe better described as highly elastic, but all in all energy itself is a critical commodity to civilization needs. We do shift our purchases and habits depending on cost of gasoline. We can shift simply to use higher blends of ethanol or avoid unnecessary trips. Utilize more efficient Uber system, walk, bike, or purchase vehicles that burn diesel fuel, E85 fuel, or grid power. Maybe a scooter, moped, or motorcycle. The Honda Rebel gets 80+ mpg. Where we live decisions, also may impact gasoline consumption. Where to vacation or what vehicles to utilize. A RV or hotel accommodation. Most of these decisions can be made on the spot, if gasoline suddenly spikes. The history of gasoline sales, though, does indicate modest change in consumer behavior over the short haul. This just means consumers are willing to pay a lot for fuel, not that it isn’t elastic. Politics did swayed to (activist) claiming we are all held hostage to high prices of fuel. At that time around here scooter sales exploded. Nowadays, we have more choice at the pump as a direct replacement; thank you ethanol. In addition to diesel cars we now have battery cars, hybrids, flex fuel vehicles and very efficient cars. Everything being equal, present day, gasoline consumption is more elastic and as a result the price spikes are moderated or dampened. The market place for transportation energy is more efficient. We need our political representatives to always improve the market efficiency. To empower competition, choice, and business force to satisfy customers needs. They should be guardians of maximizing market forces. This is a lesson to carry to health care and pharmaceuticals as well. Watch the established businesses, demand regulations to limit the competition. Were told a different story of regulation need.

With US population increasing at roughly 200,000 humans per month, and given that the vast majority of the nation is not really walkable and requires automobile transport, I think we can assume that transportation fuel consumption will continue to rise for the foreseeable future. Overall fleet efficiency would have to improve at the same rate (~0.8% per year) to keep pace, and it’s not. Absent price incentives to move people into more efficient vehicles, it seems unlikely that overall fleet efficiency will keep pace, resulting in rising gross usage. Per capita gasoline sales are down 19% from their 1999 peak, so people are using less… but there are more people… all the time.

Perhaps the new Congress next year will increase the federal gas tax, which hasn’t been touched since 1993. That was two oil wars ago (that still have to be paid for) plus the continued rotting away of our roads and bridges also needs to be addressed.